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Investing in Afrikan startups that drive financial inclusion

During May 2018, Lidya, a Nigerian startup which has developed a digital financial services platform focused on improving access to credit for small businesses in Afrika, announced that it had concluded a Series A fund raising round totalling $6,9 million. The Series A funding round which is among the largest in Nigeria, was led by Omidyar Network.

Omidyar Network is an impact investment firm founded by Pierre Omidyar's (Founder of eBay).

Among its various investment portfolios, Omidyar Network has a Financial Inclusion portfolio which is dedicated to investing in financial services startups in emerging markets. As such, iAfrikan caught up with Ameya Upadhyay, Principal (Financial Inclusion) at Omidyar Network, to hear more about their investment in Lidya, their investment ethos, and more.

Before joining Omidyar Network in 2012, Upadhyay was a consultant at Bain & Company where he developed strategies for to drive growth and enhance operations across a range of sectors, focusing on telecommunications, media and technology.

iAfrikan: What motivated Omidyar Network to invest in Lidya?

Ameya Upadhyay: There is a large body of evidence which shows that micro, small, and medium enterprises (MSMEs) are one of the strongest drivers of economic development, innovation, and employment, and yet access to finance is frequently identified as a critical barrier to growth for these businesses. In Afrika, particularly, mobile money—and all the services now run on its rails—have been great in bringing more consumers to the formal economy, helping them to transact, save, and opening access to credit and insurance. However, when it comes to MSMEs, there is still a huge gap of financial services offerings that are both affordable and relevant to them. We believe that new technology approaches can help fill this gap.

Lidya addresses one of the main issues when it comes to this segment: access to to flexible, affordable credit that MSMEs need to operate and grow their businesses. Lidya uses smart algorithms to analyze transaction data from small businesses to assess their creditworthiness. This data-driven approach allows the company to offer loans without the need of hard collateral—a requirement that has scuttled MSME financing in Africa. In the process, Lidya gathers insights that help expand its product portfolio to become a holistic partner to small businesses.
Beyond a solid, experienced team, who has deep knowledge of the local context and challenges, we were also very excited by the traction of the company in the market, even at this early stage: since launching in 2016, Lidya has already made over 1,500 business loans to MSMEs in a myriad of verticals, from farming to hospitality, logistics, retail, real estate, technology, and health.

Why does Lidya offer loans instead of investing in the small businesses?

The small businesses Lidya serves typically require short-term working capital loans to cover cost of inventory, finance receivables, etc. Such expenses are best financed by debt capital because it is much cheaper than equity capital and does not reduce ownership of the business' owner. Equity capital is best suited to finance core business expansion, hiring, R&D, product development, etc. Most of Lidya's clients are generally too small to need equity capital.

What are some of Lidya's notable achievements so far?

Since launching in 2016, Lidya has already made over 1,500 business loans to MSMEs in a myriad of verticals, from farming to hospitality, logistics, retail, real estate, technology, and health.

What does Omidyar Network look for when in investing in Afrikan startups?

We invest in the pioneering use of technology to massively increase reach, usage, and scale impact of financial inclusion solutions, working closely with entrepreneurs and collaborating with institutions that address policy to ensure that these innovations are responsibly and successfully brought to market. We are a different kind of impact investor, because our hybrid model allows us to deploy patient capital to scale innovative solutions in the marketplace, while our grants checkbook lets us expand understanding and positively influence the environment around it.

In Afrika, we are looking for entrepreneurs who have a deep and practical appreciation of local context and issues. We want to back ventures that are launching "first-of-their-kind" models to help mass market consumers take control of their financial lives. Products that help individuals manage income volatility, capture long-term opportunities, build assets, and protect themselves against shocks are of particular interest to us. In other words, digital credit for productive uses, savings and investments platforms, insurance and pension technologies are on our radar. We also love to explore 'moonshot' ideas breaking the product silos and re-imagining the status quo, our flexible capital allows us to take risks others cannot.

What advice can you give to early stage (pre-Series A) Afrikan startups?

1. Don't underestimate the cost of customer acquisition.

2. Don't wait for the perfect product-ship, listen to feedback and iterate fast.

3. Try to start with a confounding team. Entrepreneurship is an emotional rollercoaster, you will need partners to share highs and lows.

4. Focus on building a business first and raising capital later.
Don't raise capital until you need to, don't raise more than you need.